Banks start waiving prepayment penalty

Initially reluctant to waive the prepayment penalty on floating rate retail loans, banks have now started to fall in line with the regulator’s advice. The Reserve Bank of India (RBI) had questioned the necessity of levying charges that penalise borrowers repaying their loans before the maturity period.

State Bank of India (SBI), which earlier waived the prepayment penalty for new customers, has now extended the benefit to existing customers. Bank of India, Indian Bank and United Bank of India have also waived the prepayment penalty, and a few other public sector banks may follow suit.

“If the regulator ultimately wants it, we need to fall in line. The prepayment penalty is not an avenue for bankers to make money, but a mechanism to recover costs due to mismatch in assets and liabilities. If RBI feels we have to do away with that, as bankers we will have to find a way to recover the cost,” said K R Kamath, chairman and managing director, Punjab National Bank.

OWE DEAR! Prepayment penalty on home loans
Lender	Penalty (%)
State Bank of India	Nil
ICICI Bank	2-4
Punjab National Bank	2
Bank of Baroda	2
Bank of India	Nil
Axis Bank	Nil
Union Bank of India	2
Standard Chartered Bank	2.5
United Bank of India	Nil
Source: Banks

Bankers said when long-term loans were offered to borrowers, lenders raised long-term deposits to match their assets and liabilities. So, when the loans are pre-paid, banks continue to have long-term deposits on their books, leading to a mismatch.

“Banks have already agreed, but they are not issuing the guideline (to their branches) that you cannot charge prepayment penalty. We are not clear why banks charge the prepayment penalty,” said K C Chakrabarty, deputy governor, RBI.

“RBI has asked for the views of IBA (Indian Banks’ Association) on this. We are working on it...It will happen in the next couple of weeks,” said M D Mallya, chairman and managing director, Bank of Baroda, and chairman, IBA.

“We have waived the prepayment charges on floating rate loans, ahead of the industry. For fixed rate loans, there is still a prepayment charge,” said Pratip Chaudhuri, chairman, SBI. Bank of India has also stopped charging the prepayment penalty on floating rate retail loans, while Indian Bank has waived these charges for both fixed, as well as floating rate advances. “Our view is our interest rates should be so competitive that the customer should always stay with us,” said T M Bhasin, chairman and managing director, Indian Bank.

M Narendra, chairman and managing director, Indian Overseas Bank, said the lender did not levy prepayment charges on small-ticket loans. It would also waive such charges on big-ticket loans if the regulator wishes so. “I don’t think it is a very big issue. In fact, it may benefit public sector banks, since our pricing is competitive, transparent and there are no hidden charges,” said M G Sanghvi, executive director, Bank of Maharashtra.

Source: Business Standard